Tag Archives: Investing

5 Reasons March Madness Is Just Like Investing

Here is a great article from 2017 we had to share…

Filling out a bracket for the NCAA championship basketball tournament is an annual highlight for sports fans like myself. Like most people, I don’t watch much of the regular season games, but every March I start reading expert picks and researching bracket strategy in preparation for pools with my family and friends.

The process reminds me so much of investing because filling out a bracket balances expertise, risk, reward and future expectations. Winning a pool also requires some luck along the way.

With that in mind, here are five lessons from March Madness that apply to the world of investing.

1. It’s not about being perfect, but positioning yourself to get the most right.

The odds of filling out the perfect bracket are 1 in 9,223,372,036,852,775,808. Let’s just round that to 1 in 9 quintillion. The odds of consistently selecting market beating investments over a long period of time are equally daunting.

The key to successful investing is about focusing on the things you can control. From an investment perspective that means building a portfolio that is positioned to capture return premiums (such as size, value, and profitability) that improve risk-adjusted returns. Other areas of focus that are within your control include asset allocation, keeping investment costs low, minimizing taxes, optimal asset location, etc.

2. Past performance guarantees nothing about the future.

It is easy to let a team’s recent success influence your bracket picks, but last year’s tournament was last year’s tournament. Similarly, investors should never assume that their best pick (asset class, sector, country, or stock) from last year will have a repeat performance.

In addition, the winner of your bracket pool might be skillful, but he/she might also just be lucky – there is no reason to believe that success will be repeated in the future. The same goes for mutual fund managers, their outperformance in any given period may be the result of skill or luck – in fact, it is quite common to see funds that have outperformed in a given period proceed to underperform in the subsequent period.

3. The drama goes up the more you watch.

The more you watch the NCAA tournament, the more emotional you become about the outcomes. Watching the drama of March Madness is a great form of entertainment, but watching the market closely almost never helps an investor.
Myopic loss aversion tells us that the more you watch the markets, the more susceptible you become to making poor investment decisions. The best investors stay as detached as possible from daily stock fluctuations.

4. Success requires removing emotional and cognitive biases from your decision making process.

Humans are hardwired to see patterns and our tendency to only remember the times they work only engrains that pattern seeking behavior. For example, I always pick a #10 seed to upset a #7 seed based on my perceived frequency of that type of first round upset occurring in the past, but not based on any background knowledge of the skill sets of the opposing teams. Another example is picking your alma mater or a local school to advance further than what evidence and probability suggest.

Investment decisions should not be based on technical indicators, patterns or hunches. Instead, a quality decision making process emphasizes evidence-based investment theory and research. A quality decision making process should also protect us from our faulty mental hardwiring that causes us to misinterpret (or ignore entirely) probabilities, find patterns where none exist and elicit emotional responses.

5. People will brag about their success, but ignore the role of luck and past failures.

Chances are that many winners will attribute their success to skill and leave out the role that luck played in the outcome. For example, some people who win their pool by taking an extremely risky approach of picking lots of low probability upsets and having several come to fruition by chance. People that take this approach every year will frequently finish near the bottom of the standings, but they never mention those bad years.

Other winners might fill out multiple brackets, compete against only a handful of people or simply make their picks by blending together multiple expert brackets. Still, all of these people will undoubtedly share their success through the lens of skill when a conversation arises about March Madness. Conversations on investing in social situations work much of the same. I always hear people talking at social gatherings about their investment successes, but never do I hear about their failures.

 From Forbes March 2017 Peter Lazarof, https://www.forbes.com/sites/peterlazaroff/2016/03/17/5-investing-lessons-from-march-madness/#ebcbba62b752 


Financial Planning for Small Business Owners

At HFM we know many business owners that are great at what they do, (build houses, sell appliances, provide IT services) but need help managing their finances. We agree with this article that these are the areas where expertise is a necessity. 

Who hasn’t dreamed about starting a business?

Becoming a successful entrepreneur has replaced home ownership as the new definition of the American Dream, thanks to the recent collapse of the real estate market and the made-for-Hollywood stories of folks like Steve Jobs or Mark Zuckerberg, of Apple and Facebook, respectively.

But while Jobs and Zuckerberg have become household names, fame ought to be the least of the attractions in owning a business. More compelling to the tens of thousands of individuals starting a small business every year is the allure of being master of one’s own professional success.

Being the boss can be exhilarating.

But there are also significant risks to going out on your own. Unfortunately, the failure rate of small business is high, with only 20 percent of new businesses surviving for five years. Another depressing statistic: fewer than 40 percent of self-employed persons working alone make more than $25,000 a year.

The old saying, “No one plans to fail, but many fail to plan,” has special applicability to the new business owner. Starting up can be deceptively simple: Facebook was launched with just an innovative idea, a laptop, and a dorm room. But from the very outset, business owners need to be aware that even the most basic business model entails considerable financial planning complexity.

Comprehensive financial planning for an individual or couple generally involves tax planning, risk management, investment planning, retirement planning and gift and estate planning.

For each of these areas, let’s consider how business ownership takes this planning to another level.

  • Tax Planning:  The legal structure chosen for the business – sole proprietorship, partnership, limited liability company (LLC), or a corporation – will determine how the business profits are taxed. As a sole proprietor or single owner of an LLC, your business income is treated the same as your personal income, making tax compliance considerably simpler. Add partners or additional LLC members, and while again the business income flows through to the individual return, it is possible to split the taxable income (and losses) of the business in ways that can benefit multiple owners. S-corporation status can allow business owners to take some distributions of income without paying self-employment taxes, whereas C-corporation status entails separate taxation at the business level, at different rates from what the business owner pays on his personal return. To the extent that individuals and C-corporations have different marginal rates at different brackets of income, it is possible to coordinate the taxation of business and personal income in a way that provides the greatest benefit to both the business and its owner.
  • Risk Management: Most individuals need to plan for the financial risk of early death, disability, illness and infirmity, and liability or loss related to property ownership.  Once an individual owns a business, however, the risks multiply to include: interruption of the business due to a disaster; death or disability of a person key to the success of the business; loss of business property; and lawsuits resulting from negligence or defective products.  This last risk can be addressed in part by the legal structure of the business, but the others require specialized insurance coverage over and beyond what the owner holds for himself and his family.  If the business has employees, worker’s compensation coverage becomes necessary as well.
  • Retirement Planning:  It’s not uncommon for business owners to assume they will never retire.  After all, they’re presumably doing what they love, so why not continue indefinitely? Alternatively, they may see the business as the only retirement plan necessary – as a source of capital that will fund their retirement needs. Thinking along these lines is generally a mistake: If anything, a business owner may need more retirement planning rather than less, to prepare for the time when he no longer can or wishes to work, and/or the business cannot fully provide for his financial needs. The good news is that business ownership affords all sorts of tax-advantaged ways to save for retirement, and the ability to put aside amounts considerably larger than what is permissible to non-business owners.
  • Investment Planning: Most small businesses are self-financed by their owners, which results in the business becoming the owner’s major or only investment. Even when the owner has extra capital to make other investments, he may still prefer to put his money back into his business, where he feels he has the most control over his returns. Prudent planning nevertheless must be focused on diversification. Asset classes and investments must be carefully selected for the owner’s personal portfolio to offset the concentrated risk he is taking with the business.
  • Estate Planning: If a small business grows and becomes a valuable asset, simple wills or family trusts set up for personal affairs may no longer suffice for the transfer of the business. More sophisticated financial planning techniques will be necessary to ensure business continuity after death, reduce any estate taxes assessed for the business, and to provide liquidity to heirs to pay those taxes. A reorganization of the business might be advisable to create different types of ownership for family members, and to make full use of IRS-sanctioned discounts in valuing the business for purposes of gift and estate taxes.  Insurance trusts and charitable trusts can also play an important role in the efficient transfer of a small business.

One point should be clear when it comes to financial planning for the small business owner: the do-it-yourself drive that helped you start your business will not serve you well when it comes to managing the many financial issues created by that business.  This is where professional expertise often becomes necessary.

Exercise your privileges as chief executive officer, and delegate these issues to qualified tax and financial planning professionals. Their advice can make all the difference in improving your chances of business success.

From Financial Planning for Small Business Owners Copyright ©2017, Certified Financial Planner Board of Standards, Inc. All rights reserved. Used with permission.

Easing the Mid-Life Squeeze

Here is a great article that seems to apply to many of us as our children grow up, our parents become elderly and we are sandwiched in the middle.

Your college roommate arrives at your 25th reunion with a new wife not much older than your daughter.  Your eminently sensible husband comes home with a Harley Davidson and a tattoo.  You find yourself taking a sweet little red convertible for a test drive, when you had every intention of shopping for a family-sized van.  Or that vow you once made never to consider plastic surgery now seems like something only a naïve 20 year-old would make.

What’s going on here?  What is it about middle-age that brings on a full-blown identity crisis?  Just at the time in life where most people are settled – in their jobs, their relationships, their lifestyles – an irrational urge to do something different strikes from nowhere.  Maybe it is just the averageness of it all.  Neither young nor old, middle-agers feel stuck in the middle, longing to bust out and do something outrageous.

There are other kinds of mid-life crises – more common, and less spectacular than changing partners, profiles, or preferences. Unfortunately, these crises can be just as expensive, if not more so.  These are the financial squeezes that nearly everyone in their fifth and sixth decades experiences.  Between sending kids to college, financing weddings, saving for retirement, or caring for an elderly or ailing family member, there is just not enough money to take care of it all.

At a time when household income is generally rising as individuals enter their prime professional years, the demands on that income can often make 40 or 50 year-olds feel more strapped and stressed than when they were just starting out.  It’s no wonder then that mid-lifers sometimes resort to the antics of their youth.

So what can be done to ease middle-aged financial squeeze?

PLAN, and plan holistically

It’s human nature to deal with things one at a time and as they come.  In other words, we cope with the present and thereby risk shortchanging the future. Your daughter’s wedding is next year, while retirement is still two to three decades in the offing.  How likely is it that you, as a 50+ year-old, will opt to make a catch up contribution to your 401(k) rather than adding just a few more family and friends to the guest list?

The financial planning process helps us become aware of these consequences by putting the future on the table right next to the present.  It allows us to see the “opportunity costs” of each financial decision we make.  For this reason, it’s particularly important the mid-lifers take a holistic approach in their planning process. Rather than doing “spot” planning, which takes one objective, such as education planning or retirement, to determine what funding may be needed, a comprehensive plan will take into account all of an individual’s or family’s goals.

One of the first and most important steps of financial planning is to identify these goals, and to determine which are more important.  When shortfalls are identified in the financial plan, these priorities help determine where trade-offs may be necessary. When it becomes apparent in the plan’s projections that the goal of paying full freight for a child’s education entails a significantly reduced standard of living in retirement, it may become easier to modify the college funding goal to consider a greater role for student loan financing, or to investigate less expensive colleges.

Our life goals can put the financial squeeze on in middle-age, but an unexpected crisis can wipe us out.  Addressing the potential financial costs of these sudden or catastrophic events – an early death, property loss, liability claim, need for ongoing care, or even a major meltdown in the market – is a fundamental part of a comprehensive financial plan. Getting the proper insurance coverages and employing prudent risk management techniques should, in fact, be one of a mid-lifers’ first and non-negotiable priorities. Without these steps, all other life goals may become just wishful thinking.

PUT a Financial Planner in the middle, rather than yourself
One of the hallmarks of mid-life is that we feel responsible for the financial obligations of family members older and younger than ourselves.  The squeeze comes when we fully and uncritically assume those obligations, because it is just too hard to say no to our loved ones.

In such situations, the role of a facilitator in a conversation involving the entire family can be invaluable.  Consider having a Financial Planner to be that facilitator, to explore how family needs can be met and what each member can do or contribute to mitigate the financial burden that might otherwise fall solely to the mid-lifer.

When all is said and done, being in the middle of life can put us at the top of our game, financially and otherwise.  Rather than being sandwiched between generations, we can see ourselves embraced by the full range of life experiences, and in a position now to make confident, informed choices, with the guidance of a financial fiduciary.

From Easing the Mid-Life Squeeze Copyright ©2017, Certified Financial Planner Board of Standards, Inc. All rights reserved. Used with permission.

54 ways to cut your budget

ways to cut your budget

Here are 54 ways to cut your budget over the next 54 days. What makes this number so special? There’s only 54 days until Christmas! During the holiday season, time can be of the essence which may cause frivolous, last minute and/or poor spending decisions. Avoid overspending by making your budget now for gifts, parties, travel and then stick to it. Check out this article which has 54 tips to cut your budget not just during the holiday season, but all year round! http://bit.do/HFMSave These tips include how to shop for insurance, better ways to bank and how to avoid holiday impulses!

More ways to cut your budget

One of our favorite ways to cut your budget in the article is saving your receipts and tracking your monthly spending. As a client of HFM, you don’t have to do this manually. eRICH-your personal website can help you get your finances organized with just a few clicks. Your website can track exactly how much you spend each month and organize it for you. View all your transactions and link them to a budget. Get reminders and alerts to help you stay on track. You can track your spending net worth, portfolio account balances and more. Learn more about e-RICH and what it can do for you here http://bit.do/HFMeRICH

In addition to using an online budgeting tool like eRICH, some of our other favorite ways to cut your budget in this article are to: Save all your change for a year or buying in bulk and use the savings to help increase your emergency fund.  Aim for short-term goals and keep them in sight.  Keep things in perspective- is a $100 pair of shoes worth 4-5 long hours of work? Remember savings can be made in all areas of your life: Housing, Food, Medications, Banking, Transportation, home heating and cooling, clothing and entertainment and communications.

Passive vs Active Investment Management

passive vs. active investment management I think this is a great article below on the flow of money into passive vs active investment management. It’s nice to see that investors are starting to realize the power of passive investing vs active investment management.

The article also illustrates, that unfortunately the problem of investor’s destructive behavior continues. It’s a shame to see all those investors who panicked and moved out of foreign stock funds now miss out on the post-Brexit comeback.



Investing is SIMPLE!

There are three simple rules to follow.  They are 1.) Own Equities 2.) Rebalance 3.) Globally Diversify. The rules are easily understood,  but following them is a different story. That is where coaching from your Advisor is most important. You need to understand and execute these rules even when the market is down and your emotions are telling you to make a change. So no matter how sophisticated your portfolio has been built, if you don’t consistently follow the rules your results could be dire. These rules are not glamorous but they are compelling and effective.